India Raises Defense FDI to 49%, to Speed Up Procurement

India will increase foreign direct investment (FDI) in defense from 26% to 49% to attract international companies to set up manufacturing units in India.

However, the move disappointed many industry analysts who were expecting up to 74% FDI. The 49% cap with full Indian control will not be incentive enough to attract investment, they apprehended.

India’s Finance and Defense Minister, Arun Jaitley made this announcement while placing the budget for 2014-15 in the Indian parliament.

Highlights from the minister’s speech;

India today is the largest buyer of Defense equipment in the world. Our domestic manufacturing capacities are still at a nascent stage. We are buying substantial part of our Defense requirements directly from foreign players.

Companies controlled by foreign governments and foreign private sector are supplying our Defense requirements to us at a considerable outflow of foreign exchange. Currently we permit 26 per cent FDI in Defense manufacturing. The composite cap of foreign exchange is being raised to 49 per cent with full Indian management and control through the FIPB route.

DEFENSE & INTERNAL SECURITY

There can be no compromise with the defense of our country. I therefore propose to allocate an amount of 2,29,000 crore for the current financial year for Defense.

One Rank One Pension

We reaffirm our commitment to our brave soldiers. A policy of “One Rank One Pension” has been adopted by the Government to address the pension disparities. We propose to set aside a further sum of 1,000 crore to meet this year’s requirement.

Modernization

Modernization of the armed forces is critical to enable them to play their role effectively in the Defense of India’s strategic interests. I, therefore, propose to increase the capital outlay for Defense by 5,000 crore over the amount provided for in the interim Budget. This includes a sum of 1,000 crore for accelerating the development of the Railway system in the border areas. Urgent steps would also be taken to streamline the procurement process to make it speedy and more efficient.

The Defense Production

In the year 2011 a separate fund was announced to provide necessary resources to public and private sector companies, including SMEs, as well as academic and scientific institutions to support research and development of Defense systems that enhance cutting-edge technology capability in the country.

However, beyond the announcement, no action was taken. Therefore, I propose to set aside an initial sum of 100 crore to set up a Technology Development Fund to support this objective.